Could Brazil's low-cost meat threaten U.S. grain producers?

The biggest threat to U.S. grain and oilseed production may not be Brazil’s expanding production capability in these crops. It’s what it feeds its grain to, according to Roger Borges, soybean and small grain state specialist, University of Wisconsin-Madison.

Since 1991, Brazil has grown from ninth to fifth on the list of the world’s largest agricultural exporters. Borges, speaking at the National Alliance of Independent Crop Consultants annual meeting in Tucson, Ariz., said grain production is one of the biggest engines behind the growth. The expectation for Brazil’s 2006 grain crop (which includes soybeans, wheat, corn, etc.) is 123.8 million metric tons.

Soybeans are still the crown jewel of Brazilian grain production, a rank made possible with the opening of the Brazilian cerrado. This cerrado is an ecosystem characterized by deep, acidic soils, which are very high in aluminum and iron oxide.

Soybean production was introduced into southern Brazil by the Japanese, who were looking for an alternative market to the United States. “Brazil took the available germplasm and expanded soybean production north, until they ran into the cerrado with its longer day length and low pH soils.”

In the 1970s and 1980s, after soybeans tolerant to the cerrado’s climate and soils were developed, another expansion began. The cerrado region is twice the size of the U.S. Midwest soybean-producing region, although only a small portion has been opened for agricultural production.

The soil’s physical characteristics are enviable — deep, easily workable, hard to compact and not given to crusting. “You can typically find topsoils of 30 feet to 50 feet in the cerrado. It’s not rare to find soils that are 90 feet deep.”

The average high temperature in the cerrado is always above the optimal temperature for growing soybeans. In the Midwest, those conditions are reached for only a few weeks out of the year.

With wonderful weather and good soil physical conditions, the area is ideal for soybeans as long as growers can find lime and fertilizer, noted Borges.

Brazilian farmers have been very successful at expanding and cropping the region, noted Borges. “They have very aggressive knowledge generation and transfer ability. Their farmers are young and looking 20 years to 40 years into the future.”

Of the 183 million metric tons of soybeans consumed in the world today, 20.9 million metric tons are produced in the Brazilian cerrado, compared to 60 million metric tons produced in the United States. The potential for soybean production in the cerrado is 230 million metric tons, although this is not likely to be reached any time soon.

Slowing further expansion of soybean production in Brazil is the cost of moving grain from the cerrado to ocean ports. That’s changing, but not quickly, according to Borges. “Brazil privatized its ports in 1995-96. Prior to that, everything was government-owned, very expensive to ship. Now prices are going down and that has helped lower the cost of exporting soybeans and importing fertilizer.”

Brazil has only 5 percent of the paved roads that the United States has, and its railway system represents only 11 percent of the U.S. system. The rail systems were constructed piecemeal, according to Borges, meaning large sections are unconnected and may even have different dimensions. “You can’t start a train trip from the north and get to the south.”

In addition, the huge Amazon River has been opened up as an export route for agricultural goods. Today, “agricultural goods are shipped up the Madeira River to the Amazon and out the Gulf.”

In addition, Brazil has opened a port in Santarem, but its success depends partly on the reopening of Hwy. 163, which connects to farming regions in the cerrado. “This hasn’t happened yet due to environmental concerns in Brazil. Collectively, Brazil is very protective of its natural resources.”

Because of Brazil’s transportation bottlenecks, “it makes a lot of business sense to feed grain locally and haul meat out. It’s less weight and more aggregated value. Livestock operators are moving in to take advantage of the cheap local grain. This is something for U.S. agriculture to keep an eye on.

“Brazil has more cattle than the United States in the number of animals, but they are mostly grass-fed, so productivity is slower and production is less. But Brazil’s beef production is growing faster than ours and outpacing its own growth in consumption. Therefore exports have grown tremendously and for the last year and a half they have been the largest beef exporter in the world.”

Brazil’s pork production is also off the charts. This has been accomplished through increasing the size of current farming operations by expanding into the cerrado. One 54,000-sow project is expected to use 213,000 acres of corn and 105,000 acres of soybeans for feed.

Temperatures are moderate enough that no climate control is needed, one reason why Brazil is the cheapest pork producer in the world. On the other hand, “Brazil is new to the export market and had to deal with a lot of sanitary issues in building its market.”

Factors which will continue to support Brazil’s agricultural growth include cheap and abundant land, the young age of its farmers and their entrepreneurial spirit, the ability to grow 1.5 to 2.5 crops a year, cheap labor, a growing international market, an improving infrastructure and a respectful attitude toward research.

Limiting factors begin with the real/dollar exchange rate. “This has hurt Brazil tremendously,” Borges said. “Their currency lost more than half its value from January 2000 to October 2001. It has regained most of that back in the last three years. But the last two years, fluctuations in the value of the real versus the dollar has taken 20 percent off the Brazilian farmer’s bottom line.”

In addition, Asian soybean rust cost Brazilian growers $2.1 billion, or $1 per bushel, in 2004, from the cost of spraying and lost yield. Add the 20 percent loss from the exchange rate and a 10 percent to 15 percent increase in fertilizer cost, and you have a slowdown in expansion, according to Borges.

Brazil’s farmers “will diversify more in the short-term. They will further expand meat production. They will vastly expand biodiesel and ethanol processing businesses. They will stay committed to business. They will eventually open Hwy. 163, which will mean a lot to the upper cerrado region. They will continue to expand railroads and they will look at opening a Pacific route over the Andes.”

The outcome of the WTO negotiations will impact both U.S. and Brazilian agriculture, according to Borges. “A big question is whether or not Europe, the United States and Japan compromise on farm support to gain some ground on manufactured goods.

“Third world countries are more interested in agriculture and the United States is more interested in manufactured goods. So if negotiations move forward, I think it’s fair to expect that agriculture in the United States will take a bigger hit. That could put a big dent in our competitiveness.”

There is little doubt that Brazil will continue to impact the United States by increasing its low-cost meat production,” according to Borges. And if Brazil can export meat to the United States cheaper than U.S. meat producers can raise it, things could get ugly.

“Our biggest market for meat here in the United States is our internal market for grain and soybeans. We have a differential advantage by using the grain in the country versus getting it from Brazil. Livestock in the United States is healthy and expanding because of that.”

But if we lose our livestock, we’re in bad shape. We don’t eat a lot of corn and beans ourselves. Our livestock does. We let that go, we would be in a difficult position. We need the livestock.”